Geographic Arbitrage

An operational edge that requires you to get down and dirty in the weeds of it

Introduction

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“Maybe the real small trader alpha is just not having a compliance department” - Quant Arb to WorstContrarian via Twitter

There are many kinds of edges, but one of the most defendable edges is an operational edge. Effectively, you’re edge comes from the fact that doing the trade is a lot of work. Who wants to make friends with local bankers in Türkiye? Very few is the answer.

This is a niche that can hit quite a bit of scale, and as a result is an area me and my team spent a fair few months looking into (about 2 years ago) so today let’s talk a bit about the trade and it’s core details.

Geographic arbitrages move money between local and international markets for a currency.

Index

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1. Introduction

2. Index

3. How the trade works

4. Where it works

5. Bribes & Smuggling

6. Getting money out of Türkiye

7. Liquidity maximization

8. Price Effects

How the trade works

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Let’s take the example of the Turkish Lira. We start with USD, or another highly liquid and easily transferable currency (JPY, EUR, GBP). The imbalance is typically created via a mass exodus from a certain currency to liquid international currencies so in basically every case we will be selling into international markets and buying local markets.

We move our USD to local Turkish exchanges and then trade for TRY, we then transfer the TRY out of the country to a liquid international FX exchange such as LMAX and convert TRY back to USD.

We can optimize this by using cryptocurrencies. Instead of starting with USD, we start with USDT, BTC, ETH, or any combination of popular liquid cryptocurrencies. We then send these directly to BTCTurk, a popular Turkish crypto exchange. We can then convert this into TRY on exchange, withdraw it, transfer to LMAX, convert to USD, move to Binance or a liquid crypto exchange and convert back to crypto. We may also prefer to use an OTC dealer that can convert TRY directly to crypto. We end up with a roughly 1-2% profit per cycling of our capital through this trade.